2016 YEAR IN REVIEW: SELECT SEC AND FINRA DEVELOPMENTS AND ENFORCEMENT CASES www.morganlewis.com Table of Contents TABLE OF CONTENTS ..................................................................................................i EXECUTIVE SUMMARY ...............................................................................................1 The SEC ........................................................................................................ 1 FINRA ........................................................................................................... 2 US SECURITIES AND EXCHANGE COMMISSION ..............................................................5 Personnel Changes ......................................................................................... 5 Enforcement Statistics .................................................................................. 11 Categories of Cases ...................................................................................... 12 Civil Penalties and Disgorgement Orders........................................................ 13 Additional Statistics ...................................................................................... 14 Office of the Whistleblower ........................................................................... 14 Key SEC Enforcement Developments ............................................................. 15 Areas of Focus for the Enforcement Division .................................................. 16 Looking Ahead ............................................................................................. 22 SEC Enforcement and Examination Priorities .................................................. 23 SEC Enforcement Actions.............................................................................. 26 Cases Relating to Broker-Dealer Firms and Their Employees/Affiliated Persons 26 Alternative Trade System ............................................................................ 26 Anti-Money Laundering ............................................................................... 29 Blue Sheets ................................................................................................ 30 Customer Protection Rule ............................................................................ 30 Disclosures - Misrepresentations Related to Broker Compensation................... 31 Disclosures - Structured Notes ..................................................................... 32 Market Access Rule ..................................................................................... 32 Market Manipulation/"Spoofing" ................................................................... 33 Material Nonpublic Information .................................................................... 34 Municipal Advisor - Conflicts of Interest ........................................................ 35 i www.morganlewis.com Municipal Advisor Fraud .............................................................................. 36 Short Sale Violations ................................................................................... 36 Suitability - Complex Products ...................................................................... 37 Cases Relating to Investment Advisers/Investment Companies and Their Employees/Affiliated Persons ....................................................................... 38 Allocation of Investment Opportunities ......................................................... 38 Best Execution ........................................................................................... 40 Compensation Payments for Representatives ................................................ 41 Compliance Policies and Procedures ............................................................. 42 Conflicts of Interest Disclosure ..................................................................... 43 Custody Rule .............................................................................................. 47 Fees and Allocation of Expenses .................................................................. 49 Foreign Corrupt Practices Act ....................................................................... 53 Front Running ............................................................................................ 54 Gatekeepers ............................................................................................... 54 Material Nonpublic Information .................................................................... 56 Investment Adviser Registration ................................................................... 57 Misappropriation ......................................................................................... 57 Mutual Fund Share Class Selection ............................................................... 59 Performance Advertising ............................................................................. 60 Principal Trades .......................................................................................... 63 Privacy and Data Security ............................................................................ 63 Senior Investors ......................................................................................... 64 Valuation ................................................................................................... 65 Wrap Fee Programs .................................................................................... 66 FINANCIAL INDUSTRY REGULATORY AUTHORITY ....................................................... 69 Personnel Changes ....................................................................................... 69 Enforcement Statistics .................................................................................. 69 Enforcement Developments .......................................................................... 72 FINRA and the SEC ...................................................................................... 73 Targeted Examination Letters ....................................................................... 74 ii www.morganlewis.com FINRA’s 2017 Regulatory and Examination Priorities ....................................... 75 FINRA Enforcement Actions .......................................................................... 78 Advertised Trading Volumes ........................................................................ 78 Alternative Trade System ............................................................................ 79 Anti-Money Laundering ............................................................................... 79 Best Execution ........................................................................................... 81 Blue Sheets ................................................................................................ 81 Consolidated Reporting ............................................................................... 82 Customer Personal Information .................................................................... 83 Customer Protection Rule ............................................................................ 83 Disclosure to Customers .............................................................................. 85 Exchange-Traded Funds .............................................................................. 85 Large Options Position Reporting ................................................................. 86 Market Access Rule ..................................................................................... 87 Mortgage-Backed Securities Valuations ......................................................... 88 Municipal Bond Trading ............................................................................... 88 Mutual Fund Sales Charges.......................................................................... 89 OATS Reporting .......................................................................................... 89 Options Order Reporting ............................................................................. 90 Prospectus Delivery .................................................................................... 91 Regulation SHO .......................................................................................... 91 Regulatory Reporting .................................................................................. 92 Research Analyst "Flash Emails" ................................................................... 92 Structured Return Notes .............................................................................. 93 Suitability ................................................................................................... 93 Supervision ................................................................................................ 94 Variable Annuities ....................................................................................... 97 WORM ....................................................................................................... 99 SECURITIES ENFORCEMENT AND LITIGATION PRACTICE ............................................ 100 INVESTMENT MANAGEMENT PRACTICE .................................................................. 102 iii www.morganlewis.com Executive Summary The Morgan Lewis Year in Review highlights key US Securities and Exchange Commission (the SEC or the Commission) and Financial Industry Regulatory Authority